Oracle ORCL Crashes After Disappointing Earnings

Shares of tech bellwether Oracle (ORCL: Charts, News) crashed yesterday after the company missed earnings expectations on Tuesday by a broad margin. During Wednesday trading, shares were down as much as 15%, hitting a nine-year low. For its second quarter, Oracle posted earnings of $2.2 billion, or 43 cents per share, on revenue of $8.8 billion.

This marks a 17% increase in earnings and a 2% rise in revenue over the prior year quarter. Analysts had expected earnings of 57 cents per share on revenue of $9.2 billion. Even excluding one-time charges, Oracle's earnings came in at 54 cents per share, still missing the consensus by three cents. For the third quarter, Oracle now expects adjusted earnings between 55 to 58 cents per share, missing the average estimate of 59 cents. The company expects revenue to increase by 2% to 5% over the previous year, which has been hurt by the weakness of the Euro. If the Euro rebounds to previous levels on a resolution to the European debt crisis, then Oracle could theoretically post a 3-7% gain instead.

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Oracle attributed its disappointing miss to cutbacks in IT spending from large companies and government agencies due to a sluggish economy, which it expects to persist throughout the third quarter. Bullish analysts had expected Oracle's new software licenses to increase by double digits for the second quarter; unfortunately, the company posted an anemic 2.5% increase to $2.05 billion, casting its future revenue growth in doubt. This still missed the fairly pessimistic analyst forecast of $2.28 billion. Oracle is heavily reliant on these new software licenses to guarantee future revenue from maintenance and upgrades.

CFO Safra A. Catz stated that the problem was exacerbated by companies failing to sign new contracts within the previous quarter, most likely due to lingering uncertainty in Europe. "Clearly, this quarter was not what we thought it would be," Catz stated bluntly. She added that Oracle was hoping that these incomplete deals from the second quarter could be completed within the third, but offered no guarantees, stating that the approval process for new software and hardware was now slowing down due to more layers of necessary approval in companies set on pinching pennies through the economic malaise.

Oracle's computer hardware division, built on top of its massive $7.4 billion acquisition of former tech titan Sun Microsystems, has also been struggling, posting a 10% drop in revenue from a year ago, ending the quarter at $953 million. This missed the conservative analyst estimate of $1.06 billion. For the third quarter, things still look grim. Oracle expects software license sales to end up in a broad range between 0-10% higher, and a decline in hardware sales between 5-15%. These numbers are far too broad to reinforce Catz's claim that the next quarter will be much more normal next quarter. Oracle's market share of the global server market decreased from 6.5% a year ago to 6%, while rival Dell (DELL: Charts, News) gained the most. CEO Larry Ellison was more optimistic that Catz, stating that sales of its high-end servers could double by the next fiscal year and reach $1 billion.

Oracle showed few signs of strength, hurting from slow demand for databases, applications and servers - its core competencies. The company offered a slight consolation by announcing a $5 billion stock buyback, but shareholders weren't impressed. Oracle's chilling miss cooled the tech sector, as shares of rival SAP AG, the world's largest software maker, also slid 4.6% on the news.

The good news for investors is that Oracle won't collapse anytime soon, and that its long-term growth forecast is still intact. In fact, Ellison purchased over 70 new companies for over $40 billion in order to add programs that aid large corporations in managing human resources and operations, which are intended to increase the appeal of its cloud based service. The shopping spree hasn't stopped for Ellison - on October 24, the company purchased relatively unknown customer service software company RightNow Technologies for $1.5 billion. In October, Oracle also unveiled its Public Cloud service, based on its existing non-cloud database software but introducing over 100 new applications for its customers. For patient investors willing to wait out the short-term storm, Oracle is getting to cheap to ignore, with a forward P/E of 9.4 and a PEG ratio of 0.9.

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Published on Dec 22, 2011

By Leo Sun

Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.